South Korea, Russia to Create $500 Million Joint Investment Fund

South Korea and Russia agreed Wednesday to create a $500 million joint fund with their sovereign wealth funds, aimed at increasing cross-border investments in various companies and projects.

The deal was announced as Russian President Vladimir Putin arrived in Seoul with hopes of winning Korean investment in the Russian Far East, just a week after his government cut its forecasts for economic growth over the next two decades.

Russia’s oil-fueled growth has been a foundation of Mr. Putin’s high public approval, but with oil prices weakening, Russia is seeking overseas investments to help fill the gap in growth.

Just before his visit to Korea, Mr. Putin signed 17 agreements in Vietnam aimed at boosting political, military and trade ties while increasing cooperation in the energy sector.

Russia is South Korea’s 11th largest trade partner and accounts for about 2.1% of Korea’s total trade, but investments by Korean companies in Russia shrank to $103 million last year from a peak of $428 million in 2009, according to data from Export, Import Bank of Korea.

So far this year, South Korean companies have invested about $44 million in Russia.

Under the agreement, both Korea and Russia–through Korea Investment Corp. and Russian Direct Investment Fund–will invest the same amount of money into companies or projects in both nations, while also inviting private sector participation.

With the participation of “Korean or Russian investors and a bit of additional leverage, we could deploy lots of capital into joint projects,” Kirill Dmitriev, chief executive of RDIF, told The Wall Street Journal.

He said a possible investment option is for the joint fund to buy ships from Korean shipbuilders and lease them to Russian gas companies.

That way, “we will have nice return from investment and predictable cash flow from gas companies, while Korean shipyards also benefit,” Mr. Dmitriev said. “That’s actually something we (have been) working on” for the past few months.

He said that both sovereign funds are currently evaluating a number of possible joint projects in areas such as infrastructure, energy, and agriculture.

“With state-backed funds (in place), Korean conglomerates and Russian companies would also (feel) comfortable” when participating in investments, he said, adding that Russia plans to invite Korean firms in January for potential cross-border deals.

Dmitry Medvedev, the former Russian President and current Prime Minister, has long called for Russia decrease its dependence on oil and gas revenues and improve the investment climate, but little progress has been made so far. Local bureaucracy has been cited as a major reason for the lack of headway.

KIC, which had around $64.5 billion in net assets as of end-September, has been diversifying its portfolio through strategic overseas investments in sectors like commodities and energy.

RDIF, a $10 billion fund, was established in June 2011 by the Russian government to make equity investments primarily in the Russian Federation.

It has invested more than $3.5 billion in Russian companies, of which $850 million were invested by RDIF and $2.8 billion came from international co-investors.